Market Commentary for the week of September 26, 2011

Fantasy.

When a hunter runs out of arrows in the forest, it’s usually curtains for him, or, at best, a poor hunting season.  When the Federal Reserve Board runs out of tools to “fix” the economy, it’s an even worse scenario.  They are not simply useless, they become irrelevant.

And so, last week the Fed meekly bought more long-term treasuries in an effort to salve the economy by keeping interest rates, all across the time spectrum, low.  Instead, what they wrought was disdain, confusion, and declining confidence.

I’ve said it before.  Low interest rates today are analogous to giving free drinks at closing time.  You can lead a horse to water, but you can’t make him spend.

Instead, what the markets need is a surplus of cash with an incentive to buy.  Globally, such just isn’t the case.

Rather, we are faced with austerity packages and budget-cutting, which puts the onus not so much on liquidity (monetary policy) but upon demand (fiscal policy).  It’s no wonder the global financial markets gyrate intraday upon rumor, innuendo, hyperbole, and rarely, data.

Reality.

In studying my proprietary stochastic integers (a tool which measures magnitude, amplitude, and distribution of cycle trends), I have observed that although global securities try to rally on “good” news, the magnitude and breadth of participation within the rally is diminishing.  Price levels are not making new highs.  In fact, we are threatened with the possibility that sector lows might breach even further downwards.  Nothing demonstrates this more than the calamity inflicted by the Fed upon the markets last Thursday, a 400 point drop in valuation.

Within this search for downside stability we must juxtapose a panoply of bad economic news, earnings levels not withstanding.  In my vernacular, earnings that derive from technology efficiencies, layoffs, mergers or acquisitions are neither “moral,” nor real earnings acceleration.  Demand is the key to building a better mousetrap.  “If you build it (and they need it) they will come.”  Thus, the burden for recovery is entrepreneurship and the immediacy of filling a need by investment of capital.

Within that framework, the markets (and the economy) are too awestruck to get out of their own way.  Therefore, I envision a scenario in which prices decline in financial securities by as much as 15-20%.

But…

There are exceptions, however.  Certain sectors have demonstrated a resilience more powerful than their contemporaries.  Regionally, those geographies with a high concentration in natural resources have done relatively better than their counterparts.  Canada, China, Chile, Brazil, South America, have pockets of capital gains, most notably in timber, coffee, energy, and gold.

Unfortunately, the global economy doesn’t consume coffee and gold on a 24 hour timeline.  We must create wealth, and wealth equality, sufficient to sustain purchases in non-tangible assets as well as socially responsible endeavors.  Education, agriculture, technology, pharmaceuticals, biotechnology, potable water, waste management, and transit infrastructure seem like a good place to start.  While everyone’s attention is on what’s not happening in the economy, sooner or later someone will sort out a moral/social hierarchy and get to work on solving problems, and building a network of capital gains opportunities in the process.

Market Commentary for the week of September 12, 2011

Bring it down.

September has been a wild ride for global financial markets, and October is expected to bring more of the same.  On the horizon is a key inflection point at which portfolio allocation might either protect or bury any portfolios.

As global economic recovery sputters, there is a new urgency about either continuing on a portfolio path of growth, or reverting altogether to a default cash position.

Within each scenario, however, is a psychological uneasiness that borders on shock and awe.  It is much more difficult to manage client’s downside risk appropriately, than to pick winners when all stocks are rising.  It would be better to endure slow torture than to be a strategist for global mutual funds, at present.

Ever since the last manic decline in 2008 investors have suffered from an “all or nothing” passion which seems to spark panic or euphoria with every tick of the averages.  In reality, though, they shudder at the notion of one more cataclysmic decline.

Market volatility, as a result, has accelerated.  Downswings, and upswings, during the last month took on epic proportions, sometimes gyrating 4 percent in a day, and aggregating week by week to near double-digit levels.  Unfortunately, the integers look to be getting worse, not better.  Economic and market woes are pushing sentiment and relative strength data downward.

Crossroad.

While the numbers on a daily basis occupy most of investor’s attention, it is critical to realize that the overriding secular trend is still down, and that cyclical rallies this summer have all occurred within that backdrop.  Oversold, bear market rallies are sucker plays that hold up nicely for a week or two, but erode under the weight of previous owners looking to get out.

It is also quite apparent that the kind of breadth required to move markets upward just isn’t going to happen anytime soon.  Instead, upticks are limited to defensive growth companies, while sector allocation by speculators is limited to gold, currencies, or tangible assets.  As a result, 80% or more of my equity responses are to the downside, with nominal refuge being offered in basic materials, healthcare, or technology.

As if these data aren’t enough, exogenous overlays weigh heavily upon any potential exuberance the markets might sustain.  In the United States, we are about to begin the race for a new presidential election, while in Europe the issues of debt sovereignty, terrorism and domestic fiscal policy occupy the spotlight.

It seems obvious that, despite short rallies’ attempts to move the needle, there are few compelling reasons to make equities the only choice for portfolio appreciation at this juncture.  By raising cash levels in our balanced accounts, we have averted the volatility conundrum for most “long only” investors, and are actually ahead (in absolute and relative terms) for the year.  That’s not saying much, because the clay we have been given to work with is contaminated and contracting.

I look for aborted attempts, still, to drive valuation and sentiment ahead, but with a predictable pratfall likely, nonetheless.  While the “are we or aren’t we” debate is likely to heat up, the key turnaround inflection point is months down the road.

Market Commentary for the week of September 6, 2011

No resolution.

With the market recovering only slightly last week, I am once again reminded of my admonition that the market and the economy are not interchangeable, one-and-the-same phenomena.  In fact I coined the term parallel disconnect to refer to two paths which seemingly move in lock-step, but which are not innately connected in any way.  To be sure, they are sometimes confused one for the other, but in real terms the events and triggers which guide one do not necessarily, or specifically, impact the other.

This constant debate that the global financial markets reflect directly the condition of the global economy can be disproved both anecdotally and quantitatively.  Do you actually believe your job becomes more secure simply because stock prices are rising?  I’ve got news for you.  Rising share prices, and greater wealth for shareholders, influences not in the least your job stability.  One might even observe that building higher valuations in the face of low employment emboldens companies not to hire as long as they can eke profitability out of their workforce.

I am certainly a capitalist, although some might impute political motivation behind my commentary, but I know when I’m being taken to the cleaners.  As a scientist my job is to observe patterns of earnings acceleration and stock price performance.  But my data clearly indicates that today’s rising stock prices are being manifest from lower demand, smaller workforces, and greater speculation by those desperate to find or initiate trends.  Thus the parallel disconnect continues.

Any uncertainty over the market versus economic trends serves only to dampen enthusiasm for economic spending and to impede secular thematic trends.  All the way through, acrimony supplants harmony as weekly news and data become more disagreeable.

In exchange for this discord, we are left with longer periods of uncertainty, but tighter and higher levels of market volatility.  Clearly, today, the markets and the economy are not operating in lock-step, nor are they one-and-the-same.

Ceiling above.

Can we find any solace?  Sometimes a timeout, or capitulation, is necessary to review the landscape more effectively.  Last Friday’s downside reaction was emblematic of that disintegration.  You can’t go into battle and simply expect to forge straight ahead.  All the more reason that quantitative, parabolic studies make sense.  As in life, most phenomena move in cycles, ebbing and flowing.  The big mistake of the dot.com era was in thinking that technology, and the markets, forever forged onward in a linear (straight line) fashion.  We/they found out otherwise, as I had previously predicted.

How long can market-makers keep forging success out of inert economic news?  Posturing and posing only lasts for so long.  The latest economic data is still below expectations on a quarter-by-quarter evaluation.  Yet, we just keep creeping along.  Additional downside cycles are likely, in my estimation, because Relative Strength Quotients (RSI) and valuations are still too high.  Additionally, we need greater sector breadth participation in order to reverse the existing bear cycle.

There is no ambiguity in the global headlines or numbers.  Only in the way the markets seem to be responding to them.